Why US protectionism can not be the answer (page 2 of 2)

But what about protective duties, quotas, and regulatory measures that would prevent service jobs from migrating overseas? It is on this point that I disagree with Klaus Bockstaller. Import duties and quotas will make matters worse and not just in the long term but also immediately. Let me explain.

First of all, import tariffs and quotas on a large scale would increase prices for manufactured goods in the US and, combined with the ongoing inflation for services, would lead to higher inflation rates across the board and, therefore, depress bond prices further. In turn, rising interest rates would bring the refinancing boom, which has kept consumption up, to an abrupt end. In addition, selective tariffs, such as were imposed on steel imports, will not create jobs.

Because of the steel tariffs, US steel prices are now far above steel prices in Asia, Russia, and Brazil. So, what is the result? Manufacturers of goods with a heavy steel content (such as car-part manufacturers) are shifting production overseas, where not only labor but also now steel prices are lower. And if across-the-board import duties were levied, such duties would not only hurt foreign manufacturers, but also US companies, which in the last few years have set up production capacities overseas and import their products back to the US (I understand that about 50% of US imports originate from US companies overseas).

In fact, under careful analysis, it should be obvious that the lack of competitiveness of US companies has led to the shift overseas of goods production and the provision of services. Import duties or restrictions will 'protect' unproductive and uncompetitive industries and make them even less competitive, since duties will now diminish the competitive pressures.
For the US economy, rising protectionism would also mean far higher inflation rates, as well as a huge competitive disadvantage on the global markets for US corporations.

Sure, the lowest-cost providers of services and producers of goods would temporarily be hurt, but the world's economic geography is now mutating rapidly. Already, the Asian markets combined are far larger than the US economy in a number of sectors. Consequently, American protectionism would merely redirect trade flows, but not eliminate them. (As an example, Thailand's exports were up in May year-on-year by 13.5%, but exports to China soared by 82%.) I might add that the threat of protectionism will actually make exporters in Asia and India stronger, because they would then direct their efforts to lowering their dependence on the US market by looking for customers elsewhere.

Lastly, rising protectionism in the US, which is already evident in a number of industries where foreign firms are accused of dumping, would probably mean the end of the WTO and lead to retaliatory measures by foreign governments. This is hardly a picture that would be very beneficial for economic growth and financial markets, not to mention the negative geopolitical consequences for the US!

In sum, I suppose that American protectionism would be bad for everyone, but especially so for the US, as it would not cure the cause of job losses and the trade deficit problem but, rather, would address only the symptoms of these problems.